Role of Banks and regulations for stable economic growth. With an interesting analogy.

Back to basics! The financial system should favour an efficient allocation of resources and nothing else. Finance by definition is processus of transferring surplus funds to those who are in fund shortage.

In my views, Finance is to the economy what our stomachs are to our bodies. Let me explain this in greater details.

Just like food arrive in the stomach, funds arrive to our financial system. What happens next? This food/fund get redistributed to the other organs of the economy (and this preferably by the most efficient way possible). By extrapolation, the brain would be high tech companies or any research institution and the muscles could be the industries. They will both receive nutriments (funds) from the digestive system.

From this analogy we can clearly see the benefits of regulations. Taking the example of the 2008 crisis, at this time the stomach was overly hungry. The lack of regulations had the effect of letting us eat what ever we could. The stomach expanded even more, requiring even more food and no rule was here to stop this appetite. As good quality food eventually got digested, we went for lower quality food in the bins, and then we found the subprime loans. Our eagerness for food made us close our eyes and eat as much as we could until the effects of food poisoning started to kick in.

This amusing analogy showed in a quite vulgar way what the role of financial institutions should be and why regulations are necessary.

People often justify the absence of regulations by comparing the economy to theory of evolution of Darwin where there is no regulations and over time it all leads to the common good through liberty and competition. I have myself read some papers about it, find this approach very interesting but there is also lessons to be learned by comparing the economy to the human body.